Griffon Corp (GFF) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Griffon Corporation fourth quarter and full year 2012 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Doug Wetmore, CFO. Please go ahead, sir.

Thank you, Kathryn, and good afternoon, everyone.

With me on the call is Ron Kramer, our Chief Executive Officer. Before we get into the details of the call, there are certain matters I want to bring to your attention. First, I'll mention again that our call today is being recorded and will be available for playback. Details regarding the playback are provided in our press release issued earlier today and are also available on our website.

Second, during our call, we'll make certain forward-looking statements about the Company's performance. Such forward-looking statements are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in today's press release, as well as the risk factors that we discuss in our filings with the Securities and Exchange Commission.

Finally, some of today's prepared remarks will adjust for those items that affect comparability between reporting periods. These items are laid out in our non-GAAP reconciliations, which are included in our press release. Thank you.

I'll now turn the call over to Ron.

Good afternoon, everyone, and thanks for joining the call.

We're pleased with our fourth quarter results. They were in line with our expectations and underscore how well we believe each of our businesses is operating in this challenging global economic environment. In particular, Telephonics had another strong quarter and achieved record profitability for the year, benefiting in part from a more favorable product mix.

Plastics continued to show improvement from the initiatives undertaken to address the manufacturing inefficiencies that arose from our capacity expansion. Home and Building Products benefited from our Doors business, but several of our customers carry over inventory of snow tools from last year's unbelievably unusually warm winter contributed to lower sales and profitability at Ames in the current quarter.

Consolidated revenue decreased by 8% to $447 million compared to the prior year quarter. HBP, Telephonics and Plastics revenue decreased 5%, 13%, and 6% respectively in comparison to the prior year quarter. Our consolidated segment adjusted EBITDA was $37 million, which was 10% lower than the prior year quarter, and for the full year, we achieved EBITDA of $171 million. Fourth quarter EPS was $0.06 per share compared to $0.06 per share in the prior year quarter, and our adjusted EPS was $0.04 compared to $0.07 in the prior year quarter.

Let me take you through each of the operating segments in greater detail so that you can better understand the direction in which each is heading and why we're confident about their long-term prospects. I'll start with Telephonics, which continues to perform extremely well. This is because of our position on mission critical programs, insulated categories of procurement, proprietary technology, and excellent execution. Telephonics revenue in the quarter declined $18 million compared to the prior year quarter.

Core revenue, which excludes sales associated with the CREW 3.1 program for which we are a contract manufacturer, fell 7% in the quarter. Quarter revenue decline was mostly due to timing of certain awards for follow-on production relating to Mobile Surveillance Capability and Integrated Fix Towers and the timing of awards for Ground Surveillance radars. Telephonics continued the strong profitability performance achieved throughout fiscal 2012, with EBITDA of $14 million and with an EBITDA margin of 11.2, increasing 160 basis points over last year.

For the full year, we achieved record profitability, with segment EBITDA of $61 million and a margin of 13.7% compared to $51 million and a margin of 11.2% in the prior year. Most importantly, Telephonics ended our fiscal year with its highest reported backlog in the Company's history, $451 million. Telephonics achieved historically higher margins throughout this year, enabled in part by cost cutting and reorganization activities, undertaken in the latter stages of fiscal 2011 and in the first quarter of this year.

Our margins also benefited from a favorable product mix, most notably due to the LAMPS Multi Mode Radar, as well as our continued focus on manufacturing efficiencies. Telephonics is operating in a business environment with strong commercial market opportunity and many of our defense programs, which are mission critical, give us a degree of insulation from the broader defense budget environment.

Our experience suggests that demand and funding for intelligence, surveillance, and reconnaissance equipment remains strong relative to other areas of defense. We expect continued growth in Airborne ISR equipment and should see the benefit from both the continued upgrade and recapitalization of existing platforms, as well as growth from selected new platforms, with secure funding, including the Firescout program.

Telephonics is also benefiting from a strong cycle in commercial aerospace, which we believe is in its early stages and will last for quite sometime. Specifically, we believe our weather and air traffic radar systems are well-positioned for this trend. Longer term, we remain very confident that our continued investment in research and development will further extend our leadership position and we are excited for the continued development of a number of key category initiatives and product families.

While sequestration as a result of the failure to avert the impending Fiscal Cliff is a real possibility, we've been anticipating and planning for this since the summer of 2011. Telephonics has become more efficient and we'll continue to adapt our Business, regardless of the outcome. We believe that while we're not immune from the impact of budgetary constraints, we remain poised for continued growth and profitability.

Let me give you an update on the Mahindra joint venture. As you're already aware, we've signed the agreement with Mahindra in a joint venture for India. We're awaiting the completion of one final regulatory step. As a reminder, the JV will license technology from Telephonics for use on a wide range of products that have both defense and commercial applications.

The joint venture will provide the Indian Ministry of Defense and the Indian Civil Aviation sector with radar and surveillance systems, identification friend or foe devices, and communication systems. The joint venture also intends to provide systems for air traffic management services, Homeland Security, and other emerging surveillance requirements. Joe Battaglia and his team have done just an outstanding job and we're confident that Telephonics is an exceptional business that will become steadily larger and more deeply entrenched as a market leader in the future.

Let's move to Plastics. Our revenues declined by 6% during the quarter, mainly as a result of translation of European and Brazilian results, into a stronger dollar. Volume increased 3% for the quarter and was up 10% for the full year. Plastics operating performance continues to improve, varied initiatives to address manufacturing inefficiencies related to our capacity expansion are taking hold in both Germany and Brazil.

Brazil has stabilized and is delivering again against our plan. We expect it to continue to show improvement over the next couple of quarters. Europe also continues to improve, but we're committed to pushing harder and accelerating that process. Clearly, we're up against the head winds of a declining European economy.

EBITDA margins approached 9% in the quarter, up sequentially from 7% in the third quarter and compare favorably to 7% in the year-ago period. We are pleased to note that customer demand remains robust, particularly in North America. Our expanded capacity has made us a stronger global competitor and it is enabling us to service and sustain our increased market share. We continue to target an EBITDA margin rate for this business of better than 10%.

Home and Building Products revenues declined 5% in comparison to the prior year, primarily due to the double-digit decline in revenue at Ames, where snow tool sales were affected by several of our customers' carry-over inventory from last year's unusually warm weather. That's an understatement. There was no snow.

In addition, inventory reduction initiatives in several categories at big-box retailers contributed to lower sales. Notwithstanding the impact weather played on all of our results this year, we continue to focus on building on the core strength of Ames. Strong branding, innovation, customer service, and broadening our product portfolio, both organically and through additional bolt-on acquisitions.

We recently announced the hiring of Les Ireland as President of Ames True Temper. This was a terrific hire for us. Les joins Ames after nearly 15 years at Black and Decker, where he served most recently as President in North America of Power Tools and Accessory Group.

Les brings very strong relationships with some our largest customers, as well as an understanding of best practices and experience from a well-recognized and respected company, where he was directly responsible for a division that generated approximately $2 billion of sales. We're excited to have Les as part of our team and we believe his experience and leadership will be a great benefit to Ames, and we're committed to continue to grow that business.

Our Door business performed well in an improving housing market. Door revenues were down 1% in the quarter but increased 4% for the year due to a combination of better volume and favorable product mix. In short, we're pleased with its performance and the progress we've made over the past several quarters and continue to look forward to a better environment to leverage our leadership position in this business. As housing recovers, due to our successful restructuring efforts, relatively small incremental revenue will carry significant profitability benefits for the Home and Building Products businesses.

We'll talk about some corporate issues. As we execute the strategy and improve operations for each one of our segments, we expect to generate significant cash flow. We did a particularly good job this year generating operating cash flow of $90 million. We'll continue to utilize this in several ways to ensure we are providing value to our shareholders.

Our first priority remains funding our organic growth, but we believe that our excess cash flow can be used for other initiatives. Our businesses are well positioned, continue to have excellent liquidity. We're confident that we can make investments for this organic growth, pursue additional acquisitions, and return direct value to our shareholders, via quarterly dividend and share repurchases.

We remain committed to driving value to our shareholders through a full range of opportunities. Earlier today, the Board declared a regular quarterly cash dividend of $0.025 per share payable on December 26, 2012. Shareholders of record as of the close on November 29, 2012. This represents a 25% increase in our quarterly dividend, and reflects our strong belief in the prospects for our Company.

During the year, under our authorized share buyback program, we purchased 1.2 million shares of stock for $10.4 million. At September 30, there was approximately $38 million remaining under our existing $50 million buyback program.

With respect to additional strategic acquisitions, we have the capacity, the infrastructure, and skill set to identify and complete transactions. We remain looking at tuck-in acquisitions for our existing businesses, but we also continue to evaluate larger transactions that would further diversify our portfolio. We have an excellent base of business.

As we look out at the next few years, we believe that conservatively, even in a difficult economic environment, we can sustain an organic revenue growth rate of at least 5%, achieve consolidated EBITDA margins of 10%, and generate compound earnings growth of better than 12%. Again, this is strictly from our organic growth.

Doug will now take you through details of the quarter's financials and then we'll open it up to your questions.

Thanks, Ron. Good afternoon, everybody.

Consolidated revenue totaled $447 million in the quarter and that represents a decrease of 8% in comparison to the prior year quarter. As Ron mentioned, all three business segments saw reported revenue declines in comparison to the prior year. Telephonics revenue declined $18 million to $122 million, and as Ron again noted, the decrease in the quarter was partly attributable to a decline in CREW 3.1 revenue where we serve as a contract manufacturer. Excluding that CREW 3.1 revenue from the current and prior year periods, Q4 2012 core revenue trailed the prior year quarter by $8.7 million or 7%, with that variation due to timing of orders regarding Mobile Surveillance Capability, Integrated Fix Tower, as well as the timing of awards for Ground Surveillance radar.

Telephonics adjusted EBITDA of $13.7 million was roughly equivalent with the year-ago quarter, while segment EBITDA margin increased 160 basis points. While Telephonics full year revenue of $442 million declined 3% compared to 2011, core revenue, again excluding CREW 3.1 revenue from both years, increased 2%. Importantly, we achieved record profitability with segment EBITDA of $61 million, and a segment EBITDA margin of 13.7%. This compares to $51 million and a margin of 11.2% for the prior year.

Telephonics' improved profitability has been a function of favorable product mix and manufacturing efficiencies, as well as lower selling, general and administrative expenses related to the timing of proposal and research and development activities. Operating results also benefited from cost reduction activities undertaken -- the voluntary early retirement plan undertaken in the prior year, and other restructuring activities implemented earlier this fiscal year.

Importantly, the improvements to the Telephonics cost structure are not only contributing to current profitability improvements, but they are also making business more cost competitive in bidding on future business opportunities. Telephonics backlog reached a record of $451 million September 30, 2012, up from $422 million at June 30 this year, and $417 million at September 30, 2011, giving us confidence in Telephonics near to medium-term operating outlook. About 70% of that backlog will be realized in our fiscal 2013.

Turning to Plastics, revenue in the current quarter decreased $8.8 million, or 6% compared to the 2011 quarter. For the quarter, volume increased 3% and Plastics enjoyed a 1% benefit from favorable product mix. However, this growth was more than offset by the 9% unfavorable impact of translation of European and Brazilian results into a stronger US dollar. The Euro dollar exchange rate for the quarter was down about 12% compared to the prior year quarter, and on the same basis the Brazilian real was down about 20%.

Selling price adjustments due to resin fluctuations reduced revenue by 1% in the quarter, and recall that Plastics adjusts customer selling prices based on underlying resin costs on a delayed basis. Revenue in 2012 for Plastics increased $27.4 million, or 5% compared to 2011, driven by a 10% increase in volume. And again, as with the quarter, the benefit of the volume growth was partially offset by 5% unfavorable impact to translation of European and Brazilian results into the stronger dollar, and selling price adjustments due to resin fluctuations did not have a significant impact on 2012 revenue.

We continue to see sequential improvement in Plastics operating results, with EBITDA increasing $2 million, or 19% compared to the prior year quarter. The improvement came from the higher volume, favorable product mix, and continued efficiency improvements at our expanded facilities in Germany and Brazil. EBITDA growth in the quarter was partially offset by the impact of a stronger dollar, as well as somewhat higher SG&A expenses, and as with revenue, resin did not significantly impact profitability in the fourth quarter.

Though there remains significant room for continued improvement, we're benefiting from improvements made so far in operations in the expanded locations, and we expect this trend of improvement to continue well into fiscal 2013. And we'll continue to update you on these undertakings as progress is made.

Home and Building Products revenue of $184 million in the quarter decreased $10.6 million, or 5% compared to the prior year quarter. Ames True Temper revenue decreased 12%, mostly due to weak snow tool sales and the impact of inventory reduction initiatives at several of the big-box retailers. Southern Patio helped to offset some of the decline year-over-year, but the fourth quarter for us is a pretty small quarter from a Southern Patio revenue perspective.

Q4 2012 door revenue declined 1% to $113 million due to lower volume, but the lower volume was nearly offset by the benefit of favorable product mix. Segment adjusted EBITDA in the 2012 quarter decreased 37%, or $6.4 million to $11 million. The decrease was driven by the lower snow volume that also affected related Ames True Temper plant absorption in the quarter.

We had anticipated this Q4 impact of snow tools at the time we updated 2012 guidance after the poor winter quarter. The impact of EBITDA decline in Ames due to snow was partially offset by favorable product mix and manufacturing efficiencies in our Doors business and lower warehouse and distribution costs overall in the Home and Building Products business.

Consolidated gross profit in the fourth quarter was $97.7 million, a margin of 21.8%. Net margin was in line with the prior year quarter. Consolidated selling, general and administrative expenses were $85 million in the quarter, compared to $84 million last year. The increase in such expense as an absolute value is primarily the result of the inclusion of Southern Patio in the current quarter's results. Remember, we acquired Southern Patio in October of 2011.

Overall, we continue to exercise tight cost control across our Businesses. For the full year, SG&A per book year is approximated 18% of consolidated revenues. Our effective tax rate for 2012 was 22.5% compared to a benefit of 48.2% in 2011. The 2012 rate reflected discreet benefits of $5.1 million, primarily from the release of previously established reserves for uncertain tax positions on conclusion of tax audits, as well as benefits related to various tax planning initiatives.

The 2011 rate reflected discreet benefits of $4.6 million, primarily from tax planning related to unremitted foreign earnings. Excluding discreet tax items in both years, the 2012 rate would have been about 45.8%. The 2011 benefit would have been 16.4%. As we stated in the past, in both years, the effective rates reflect the impact of permit differences, not deductible, in determining taxable income, mainly limited deductibility of restricted stock, as well as the impact of tax reserves and changes in earnings mix between domestic and non-domestic locations.

Q4 net income totaled $3.5 million, or $0.06 per share compared to $3.4 million, or $0.06 per share in the prior year quarter. The current quarter results included restructuring and acquisition costs net of $2.1 million, or $0.04 per share and net discreet tax benefits of $3.5 million, or $0.06 per share. Fourth quarter 2011 results included restructuring and acquisition costs net of $2.1 million, or $0.03 per share and discreet tax benefits of $1.3 million, or $0.02 per share.

The current quarter adjusted net income was $2 million, or $0.04 per share compared to $4.2 million, or $0.07 per share in the prior year quarter. As I mentioned before, our press release includes a reconciliation of GAAP amounts to the adjusted amounts just mentioned.

At September 30, 2012, we had $210 million in cash and total debt outstanding of $700 million, resulting in a net debt position of $490 million. About $178 of our $200 million revolving line of credit is available for borrowing. Letters of credit issued account for the utilized portion, but there's no actual draw under the line of credit.

With respect to our current expectations for fiscal 2013, we expect consolidated revenue to be in the range of $1.9 billion to $2 billion. We expect Home and Building Products revenue to increase in the mid single digits. Telephonics core business, excluding any CREW 3.1 activity is also expected to achieve mid single digit rate of growth, and Plastics will grow on a dollar basis in the low single digits. The currency comparison for Plastics, which is our most international business, is pretty difficult, particularly in the first half of our fiscal year, and as is always the case, Plastics guidance is the most susceptible to variation due to a combination of resin pricing and foreign currency impact.

Based on the revenue expectations just outlined for 2013, we expect segment adjusted EBITDA to be in the range of $180 million to $185 million for the year. Corporate and unallocated expenses are expected to be in the range of $28 million to $29 million for fiscal 2013. Remember, corporate includes all equity compensation for the Company, which is expected to be between $10 million and $11 million in 2013 compared to $10.4 million in 2012. I expect interest expense to be pretty much in line with that incurred for fiscal 2012.

And in terms of expected tax rate for 2013, based on what we know right now, we currently expect our fiscal 2013 rate to approximate the normalized rate, excluding discreet items that we reported for 2012. Currently, I would expect it to be in the range of 46% to 48%. Geographic earnings mix can significantly influence our consolidated effective tax rate. The rate may also significantly vary because of legislative actions that may be undertaken with respect to the US corporate tax rate, and so we'll update our effective rate comments as 2013 unfolds.

Capital spending in 2012 was about $69 million. We currently expect capital spending of $60 million in fiscal '13, that's in line with our depreciation for fiscal 2012. And I expect that capital expenditures will fall below depreciation in 2014.

Depreciation this past year was $58 million and amortization was $8 million. We expect depreciation in 2013 to be about $64 million, increasing because of the capital spending we've undertaken in the past. Amortization should be pretty much the same as the year just completed.

With that, I'll turn the call back over to Ron.

Again, we're pleased with our overall performance for the year. We're well positioned for today's uncertain business and economic environment. Telephonics is poised to grow. Plastics will continue to improve and we expect Home and Building Products to benefit from a recovery in housing.

We see excellent growth opportunities, both in the existing businesses and through strategic acquisition, particularly with smaller tuck-ins that could meaningfully boost profitability. With any improvement in the global economy, we expect to see our profitability significantly expand.

We believe that all of our businesses have room to grow and should outperform their competition. We have ample resources to invest in these businesses to support their growth and we remain excited about their prospects. We've not only built a strong business, but we have talented management in each of our businesses to take us forward, enabling us to continue to create value for our shareholders.

Thank you. And with that, operator, we'll open it up for questions.

(Operator Instructions)

Bob Labick, CJS Securities.

Good afternoon. Thanks for taking my questions. You guys have touched on a lot. I just wanted to trill down a little further on some of your comments.

Sure.

Starting with HBP and Ames, obviously, you had the very tough comparison with the non-existent winter last year. Could you just help us understand what it will take -- how long will it take to get through that inventory correction? And what are more normalized margins once we get through that?

Bob, we could go through that inventory correction very quickly if we had a couple heavy snowfalls like we had in the east last week.

And I'll tell you, at this point last year, 11% of the country was covered in snow. You know, at this point this year, 31% is covered in snow. That was on the morning news.

Look, obviously the better the snowfall in the United States and in Canada, and I want to point out Canada has had two record years of low snow, we're the dominant snow shovel provider, snow tool provider in Canada in Garant, and have had two horrifically low snowfalls.

We own this business with a very long-term horizon. There will be good years, there will be bad years. It's out of our control. And we are hopeful that we have more snow. As a skier, I'm always looking for better ski conditions, so maybe this will be the year.

I think credit to the Ames folks that forecast the impact in the fourth quarter on the under absorption that we saw because of anticipated lower snow sales. We had a pretty good handle on that.

The one thing that they are just not capable of predicting is when the snow is going to fall. The only way to eat through the inventory at our customers and to drive further demand for snow tools on the part of Ames is to get snowfall. That's one thing that we're just not that good at predicting.

Fair enough. Jumping over to Telephonics, any updated clarity post election on any impact if there might be from sequestration? And then if not on that, can you give us an update as well on Firescout, where it stands and how that program is progressing?

Look, we are -- we can't add anything to the much bigger conversation. Sequestration is a really bad idea. We are hopeful that the Fiscal Cliff is avoided and that there is a deal.

I think it's clear that it's good for the economy. It would be, and this is a personal view, a horrific result for the US economy for us to actually have to deal with the effects of sequestration, but this is not a new problem. As I said in the remarks, we've been looking at this since last summer and we have taken steps in dealing with what we expect to be a continued pressure environment for defense contracting, whether or not sequestration happens.

We are very well positioned on intelligence, surveillance and reconnaissance programs and particularly that our confidence is not dependent on the result of what's going to happen or not happen in Washington over the next several months. We have funded backlog, $450-odd million going into this year. We have good visibility on our programs, particularly our radar-based programs, going through 2013, the Firescout program was never intended to go into production until the back end of 2013, so that's a funded program.

How that might be impacted, if and when sequestration ultimately happens, is of course an issue, but for us, it was always a 2014, 2015, 2016 impact on our growth in that business. When we look back and we look at where Telephonics was in 2008 to where they are today, we've grown our top line by over 25% and we've grown our EBITDA line by nearly 50%. We really like this business. It's done an absolutely outstanding job of being able to grow in difficult times.

There's going to be continued issues around the world, and regardless of what the defense budget ultimately turns out to be, we think our products are positioned extraordinarily well to be a beneficiary of whatever spending is going to be there to provide for national defense. And we've taken all the other initiatives to grow internationally to be able to offset whatever slowdown in growth might happen in the US market.

Meanwhile, they have done a very good job of right sizing their cost base.

Great. I'll ask one more and get back in queue. Jumping over to films, obviously driven a lot of growth this year, the 10% volumes is great. What

Well, it's an evolutionary process and I think Ron and I would be the first ones to admit that it was -- it's taking longer to get there than we initially thought and that's why we extended the timeframe for meeting those expectations earlier this year. It's into 2013 and we're going to have to continue to update because a lot of it depends as well as continuing to get top line growth and volume growth, because this is a business that needs that volume throughput to absorb the expenses. As Ron mentioned, particularly in the European economy is weak and that impacts profitability for the Plastics business.

They are continuing with a number of initiatives to improve the yield and improve efficiency. They have made a great deal of progress on that and they deserve credit for the progress made. But we expect them to continue to improve further.

Having said that, we were at the 9% EBITDA margin, just under it this quarter and that is a substantial step forward from the past several quarters and certainly from a year ago. So they are making great progress.

And I would add to that, you know, Alan Copeland has been running the plastics business since January. He's done an outstanding job. He's rebuilt the team around him. I expect him to continue to do that.

Our relationship with our key customers is good and we're going to make it better. We're committed to growing this business. We can't deal with the slowdown in Europe any other way than how we have been dealing with it. We're trying to offset higher resin prices, which is somewhat counter intuitive in a declining market.

But we like where the business is today, better than we liked where it was sequentially a quarter ago, and certainly where it was a year ago. And I hope to be able to say the same thing both sequentially over the next several quarters and over the next several years. I think we're on the right track of positioning the business and, look, North America is clearly carrying the business today, and the rest of the German and Brazilian businesses have shown significant improvement. So we like the trends that we see in that business.

Great. Thanks very much.

Tim Quillen, Stephens, Inc.

Good afternoon. Just looking at Ames historically, if you go back to 2007, 2008, they were doing something like $500 million in revenue and apples to apples, excluding out a couple acquisitions since then, you are probably below $400 million in revenue.

So the question is, how much of that is that delta is weather and how much is the economy? And what would you think would be a normal revenue year if weather was, quote, unquote, normal?

Well, let me, I think there are a couple of questions in there. Let me break it down.

First is that, we believe that Ames has maintained market share and in fact, we believe we've gained market share. And we've positioned the Company going into 2013 and beyond to be able to maintain our position with all of our key customers. Clearly, that has happened with some level of margin erosion and, that's a reflection of weak economy, both domestically and global over capacity where we have had to deal with price competition.

The broader point is that it's pointless to talk about the impact of weather, because it didn't happen. But, if you had to put a number on this year, and I don't want to try to go back to the years prior to us owning the business, but this is a $25 million top line impairment by having no snow season.

Yes, it could arguably be north of that Tim. It's just a question of how much remains in the inventory of our customers, which we think we have an estimate of, but that's the cascade effect that we'll really only have the true answer for when, at the end of this winter season when we evaluate the performance. So it's usually -- I guess we've learned that bad snow seasons lead to two bad snow seasons because of the impact of the inventory adjustment.

And it's not just snow, so we had two 100-year events, remember spring of 2011, we had no spring because of excess rain and there was no lawn and garden sales. And we've had a winter, both North America that was problematic this year and in Canada for the last two years. So clearly we've struggled with weather impact on the business.

The offset to that has been we reduce the manufacturing costs. We are going to continue to right size our manufacturing as we go forward and we'll continue to look at product innovation, which is really the key to growing back the margins in addition to looking for tuck-in acquisitions.

So we clearly understand that the top line of this business needs to improve. Part of that comes from a better domestic economy, and part of it comes from a better set of weather patterns than what we've experienced.

Got it. And then on your most recent tuck-in acquisition on Southern Patio, first of all, do you have the specific revenue contribution in the quarter?

Oh, it's a couple million dollars. It's a very small quarter. That typically is in, at the end of our first fiscal quarter and the bulk is in the second quarter.

Right. So, how much would -- so in your first quarter how, is it that low, or is it a little bit higher, is that how it kind of ramps up seasonally?

Southern Patio?

Southern Patio, excuse me.

Southern Patio ramps up significantly the latter state, December and then substantially in the January to May timeframe.

Right. And they just generally, as that performed, has the revenue contribution met your expectations or exceeded?

It's met our expectations and exceeded our profitability.

And you mentioned--

That was very complementary as well with the existing dynamic design business.

It was a good tuck-in acquisition for us and it was as we had advertised. We thought we were picking up incremental revenues at a very low multiple.

Right. Right. And are there others like that, that you have identified?

We are always looking. There's never a day where we're not searching for those types of opportunities.

Right. And then on Telephonics, what are you thinking about right now for bookings in the December quarter and the March quarter, as we have all this swirling nonsense around sequestration?

Well, you know, as we said at September 30, the book is at a record high. And we have had strong bookings to date through October. And so I think the backlog that we have combined with right-sizing the cost structure has insulated Telephonics for the first part of our fiscal 2013. And if they don't get the Cliff addressed by December 31, and they kick it down the road a little bit, which would not be surprising, at least Telephonics will continue to be in a very good position with the funded backlog and a cost structure that will allow us to maintain profitability at or close to the current levels.

Right.

So while sequestration is clearly a broader issue, we very much have visibility within Telephonics through 2013 and the pattern there has been quite positive over the last several years.

Right. And on the CREW program, do you expect additional revenue in your fiscal 2013, or what's the outlook there?

Yes, we do expect some. It might very well be spare parts for existing units or it might be some additional orders. It's kind of hard to say because there's no real pattern for that and also, you are seeing the anticipated draw down of our troops, which should impact that.

The guidance that we provided was exclusive of any CREW 3.1 revenue. And then we'll always continue to highlight CREW 3.1 as either increase or decrease simply because we are a contract manufacturer for that.

Right, okay. And then just lastly, to get to that mid single-digit growth in Telephonics, excluding CREW 3.1, what are some of the specific programs that you feel like will drive some of that growth? Thank you.

Tim, probably the same ones that have in the past. As Ron mentioned, the LAMPS MMR, very strong. And we got--

The extension.

The second contract with Lockheed Martin for that I think in May of 2012. And Telephonics also has the benefit of several programs, so not singularly reliant on any one. And based on order activity, foreign military sales and so forth, it's really across a broad base of programs.

And it's got some near-term significant growth possibilities, particularly around mobile surveillance.

Okay. Thank you.

Again, we like the trajectory that it's been on and we like the products and the backlog going into this year and beyond.

Perfect.

Thanks Tim.

Thank you.

(Operator Instructions)

Zahid Siddique, Gabelli & Company.

Hi. Couple of questions. First one, on the Ames True Temper business, what was the revenue growth for the non-snow type business, so for spring or summertime business, landscaping type business, what was the revenue growth in the quarter?

Well, that's a pretty small part of the business this time of year. You're selling leaf rakes. Seems to be one of the only things that you can predict with a great deal of regularity, is the fact the leaves will fall in September and October.

But remember, the spring lawn and garden season is where the bulk of lawn and garden revenue new is from. And remember earlier in the year, one of the other weather events that we've enjoyed this year is one very weak snow, but also after a very strong April, the balance of the spring lawn and garden season was really dealing with drought conditions, which impacted lawn and garden sales.

Okay, and in terms of the profitability of that segment, and I guess the Building Product segment in general, I mean, there was -- it seems like there is a sizable volatility, if you look between Q3 and Q4. It seems like there's a sizable drop and even over a year-ago period in terms of profitability. I mean, what's the rationale then to be in a business that can be so much volatile in that respect?

Well, first of all, it's been around since 1774, so it's probably weathered some unusual weather patterns before. But the volatility and the profitability in the fourth -- in our fourth fiscal quarter was really driven by the absence of production of snow tools, and again, that was because of the excessive inventory at our customers. And that's why I mentioned earlier on the call that I complimented the Ames True Temper folks for having foreseen that slowdown in production in the fourth quarter and taking that into account in providing the guidance that we provided when we released second quarter earnings, which we said we would be at around $170 million and we came in around $171 million.

There is volatility, because it's a business that you need to produce and get throughput. It's not dissimilar to Plastics in that regard.

Yes, to your point, Zahid, we actually are quite pleased. Of course we would have liked to have more revenue and more profitability, but everyone wants to talk about the long-term. And we own a business that we think has leading market share position that's complementary to our existing garage door business in terms of our relationship with customers. And in spite of the worst possible impact, we still did better than $70 million of EBITDA and we generated on the Ames part of the business, you know, cash of more than $20 million.

So this business is good for us. It's strategic and we're going to continue to grow it. There will be good years, hopefully in the not distant future for that business, but the balancing of owning it among the group of companies in my mind is far better than owning that as a single asset, or single financed entity. We very much like what our blended performance and what our blended credit profile looks like in owning that business.

Okay, and just moving on to the garage door, in the quarter, revenue grew about 1%. I felt that was a little light. If we look at any Building Products company that has reported, with the housing market recovering, today Home Depot reported, recently we have had manufacturers report.

Why is that number not 15% or 10% when we are seeing such improvement in the housing market? What's -- you were 7% in the quarter before. So what's the shortfall there and was that a profitable segment or subunit?

Well, first of all, the sales actually declined 1%.

Right.

As we said. Although we did have favorable mix. And for the year, we were up between 4% and 5%, which I think is a really outstanding performance when there has been such a persistently weak housing market for this year.

Let's not confuse. There is an improvement of the housing market. There has not been a recovery in housing. So this is the beginning of a recovery in new starts, in new construction. And from where we are from a capacity standpoint, we're still the leading garage door manufacturer in the United States, and we absolutely are pleased with what we're seeing in that business, but there is not a broad-based 15% growth pattern for that business.

Okay, and was that profitable?

Yes, yes, sure.

And in the quarter?

Yes. But remember, profitable for the quarter, profitable for the year --

Yes remember, we don't break out the profitability of Ames True Temper and doors individually. But both businesses are profitable, have been profitable throughout this year and have been profitable since the day we acquired Ames True Temper.

Okay, great. Just last, real quick question, did you say the tax rate would be 46% to 48% for 2013?

Yes.

Okay, and why is it high? You might have explained that. Why is it higher than --

Because of the nondeduct -- certain permanent differences that are nondeductible, most significantly some restricted stock that is nondeductible. It's the same reasons that have been disclosed in past press releases and 10-Q and I believe actually the last year 10-K.

Okay, thank you.

Marty Pollack, NWQ Investment Management.

Hi. Sorry to be more questions on the ATT, but I just wondered, clearly the last two seasons have been very poor. You saw that in last year's sales, as well in the June number. Most of that attributed to the snow -- low snow environment.

The additional wrinkle this year was the drought impact, because clearly -- because I'm just wondering, the $25 million you suggested was I think a number that was maybe light. Did that include the drought impact as well?

No, that was only the snow. The drought, which really impacted us in the May, June, through July and August timeframe. Very difficult to quantify per se, but obviously it led to excess inventory at many of our customers, which impacts follow-on sales for restocking.

But we did not quantify the drought impact. We just know that it was an element that affected our business, as well as a number of other lawn and garden companies.

Point of sale at retail significantly down in our fourth quarter.

Curious, on the operating rate, just wondering whether in this quarter, what did you see during -- I mean, does the op rate translate into lower production and lower sales as well? Just wonder from a timing.

Yes, yes, it was both of those. Remember, this time of year, believe it or not in August and September, Ames would typically be shipping their -- the fill-in for snow shovels and we saw very little of that. There was some. But many of our customers were left with extraordinarily amounts of inventory because of the absence of snow last winter.

As a result of that, and in the planning process, we foresaw that our customers had excess inventory. We didn't produce additional snow shovels or as many snow shovels as we might otherwise do. Remember, not only were our customers left with additional snow shovel inventory, but we were left with excess inventory, which it didn't go bad. A snow shovel doesn't go obsolete--

Fortunately, they don't go out of style.

But we shipped them in August and September, as well as October, when we ideally would have shipped them last January and February.

And operating rates would have been historically at a low level during this quarter then?

Compared to a normalized year, yes. The expense absorption at the main manufacturing location for Ames True Temper was markedly impacted by the reduced snow shovel production. That flowed through as a period expense.

Okay. Just turning to Telephonics for a moment, the most recent this quarter still showed fairly strong margins, around 12%. Just going forward, was the sort of what looks like an improved mix and a lot of things that remain very resilient. Is this likely to be kind of a new normal margin? You've historically been near the 11% area.

We clearly had the June quarter was unusual, but September quarter coming back still fairly strong. Is this more indicative of future Telephonics margins? The 12% type number?

It is and it's what we have been working through in taking costs out of the business and we're going to continue to look at improving margins there.

We counseled earlier this year that no one should model Telephonics at a 14% or 15% sustained EBITDA margin level, but, because we were getting the benefit of costs taken out that were not replaced. But they've lowered our cost base and that will allow them to be more competitive moving forward. But I think realistically we also said that a business that historically was 10% to 11% EBITDA margin could reasonably be modeled at a 12% to 13% EBITDA margin long term. And it's going to vary a little bit year-over-year depending on product mix.

Lastly, just on, your comments about being prepared very early for the possibility of sequestration, to what extent did you do anything unusual so that --

Well, Marty, it's more than sequestration. It's obvious that the defense budget is going to be under pressure.

And we -- we're consolidating facilities. We've dealt with right-sizing human resources. We are preparing ourselves to be increasingly more profitable on what we expect to be not particularly robust top line growth and the way you make more money is to take costs out of your business.

And that was obvious to us last summer that things were going to be more difficult. Joe Battaglia has executed the strategy brilliantly and the results speak for themselves. We think that's here to say.

Remember, we took out -- we had a voluntary retirement program at the end of last fiscal year. We reorganized certain business units in the first quarter of this fiscal year. There were some additional early retirement actions taken in this fourth quarter, which is the restructuring charge for Telephonics. And we consolidated facilities at Telephonics during the course of this fiscal year to better streamline manufacturing and reduce overhead.

So -- and all those things were driven based on knowing in the summer of 2011 that the potential for sequestration was facing us. So as Ron said, kudos to Telephonics management for taking those actions early on. Is it enough? No one knows.

Right. But, look, it gets back to we believe our products are necessary, are valuable and that we deliver great product and great value to our customers. So we're going to be here.

Telephonics has been around for -- it will be celebrating its 80th anniversary next year. This is a really good business, really well run, and we're going to continue to invest in people, in facilities, and regardless of where the defense budget goes, we expect to continue to perform.

Thank you very much.

Philip Volpicelli, Deutsche Bank.

Good afternoon. I have two questions. I'll just put them both out there and you guys can address them separately.

The first is, there's been talk of Kimberly Clark moving out of Europe, with their diaper business, and just wondering what effect, if any, that will have on your business. The second question is, with potential changes to the tax policies, what are your thoughts regarding a one-time special dividend before the end of the year, assuming that the government can change things that quickly?

First, on the Kimberly-Clark, we do business with them. We look to continue to do business with them and the reflection of their -- it's more than talk, as I understand it. They have formally announced that they are exiting a number of businesses in Europe.

I think that's a reflection of my earlier comment, is just how difficult the European economy is and how much over capacity is there and at some level, this is a positive for us. We're hopeful that some of that business goes to some of our other customers in the market and that we get some more absorption in our German facilities. So on balance, I think it's got some upside, though this remains a very difficult and moving set of variables and what's going to happen to the European economy, let alone what's going to happen to the US economy.

To your comment about special dividends, while we've increased our quarterly dividends, we have no intention on paying out a special dividend. We are going to build this Company. We've built a very liquid balance sheet. We're going to use that to opportunistically grow.

We've bought back stock. We're going to continue to buy back stock at these levels. I think it's mispriced, but we'll take care of that on our own.

We like the position of our Company. We like where our balance sheet is, so there's no intention to do a special dividend.

Ron, just to go back to the diaper piece, there's none of your competitors that could displace you, in other words, there's no one else that's vertically integrated that would possibly gain the share that Kimberly-Clark's going to lose and would displace you?

We're going to continue to compete for every piece of business that we can profitably win with every customer that we can do business with. It's -- there is no shortage of competition for everything we do and every market we do it in, and we're going to win because we are able to satisfy very complex customers at competitive prices.

Okay, great. Thank you. Good luck.

Thank you.

If I may add one bit of color to it in response to an earlier question, the -- one of the reasons the door sales was down 1% this year versus the prior year quarter, very difficult comparison. Doors increased just about 10.5% last year in the fourth quarter, so they had a very strong performance at that point in time. So I think difficult comparisons. Again, it speaks more to the logic of comparing on a year-to-year basis because you will get some impact of shifting from one month or one quarter to the other. Ron?

Yes, I guess, are we out of questions?

And with no additional questions, I'll turn things back over to our speakers. Please go ahead.

Okay. Well, thank you all for joining us. Again, we think that we're very well positioned and we look forward to continuing to report as we go into the balance of 2013.

So thanks again. Bye-bye.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all for your participation and have a good afternoon.